TAX-FREE STRATEGIES IN AN UNCERTAIN ECONOMY

FinanceTax

  • Author Thomas Swenson
  • Published December 28, 2022
  • Word count 1,153

Problems ahead in 2023: Markets down. Recession deep. Taxes up.

Solutions: (1) Irrevocable life insurance trust (eliminate all taxes legally forever); (2) Leveraged long-term care (LTC) insurance; (3) 401(h) health expense account: tax trifecta – tax-free contributions, growth and distributions. (See SOLUTIONS, further below.)

"Economists predicted 12 of the last four economic crises." You need not be an economist, however, to have a good idea where things are headed.

The US is in a "perfect storm" of inflation, economic recession aggravated by high interest rates, high unemployment, deficit spending, continued "money printing", and looming tax hikes.

Income, capital gains and transfer taxes are at historically low levels. Tax rates are likely to increase before the scheduled sunset in 2026.

The US government debt already stands at $31.5 trillion, and Congress just authorized new spending of $1.7 trillion. The US has joined the group of nations having a national debt greater than GDP (ratio of 120+%).

Economic activity across the 50 states has slowed to a stall. Thus, state and local government revenues from income, sales, and business taxes have slumped.

How are various government entities going to finance debts and deficits?

Well, of course, the US government could simply "print money" to finance its spending. Essentially, the Federal Reserve has been doing that already. The infusion of cheap money over the past 20 years artificially propped up the equity and debt markets to the extent there is now little correlation with the economy in recession. As the Fed has slowly closed the money spigot, markets and economic activity have sunk.

The 50 states are not allowed to print money or run budget deficits. So, their financing options are limited. If state and local governments cannot pay their employees, they will be joining the private sector's unemployed.

Assuming that the federal government does not abandon its fiscal habits, we can further assume that federal and state income tax rates will rise sharply in the relatively near future to pay for federal spending and debt servicing. (See, The Deficit Myth by Stephanie Kolten for a different approach under "modern monetary theory". Because it is sensible, however, it will never be adopted in the USA.)

As noted above, the US is in a recession. The equity and debt markets are volatile and . How long will the Fed keep creating money out of thin air? How long will the Treasury continue spending borrowed money? When the music stops, the markets could drop like rocks. If your investment and retirement portfolios are still invested in the markets, now is the time to get out.

The individual gift and estate exemption is now at an historical high of $12+ million. The GSTT exemption is also currently $12+ million. They are both scheduled to decrease to $6+ million after 2025.

Now is the time, therefore, to do preemptive estate and legacy planning. Inevitable tax-law changes wrought by Congress could be retroactive; generally, however, new tax laws "grandfather in" transactions and structures already completed.

Asset protection should not be ignored in estate and legacy planning. Asset protection is not just for the ultra-wealthy. Anyone can be sued anywhere anytime, even if only $100K is at stake. For example, if you own a house, work as a professional, or have a married child subject to divorce, your assets and your legacy are at risk. In a broad sense, estate planning and asset protection include wealth building and wealth preservation by reducing market risk, reducing tax risk, and reducing legal (court) risks.

In addition to the tax-law changes affecting estate and legacy plans, the fiscal pressures on federal, state and local governments will probably increase taxes across the board and those taxes will stay high for a long time. In other words, your reduced income during retirement could still put you in a relatively high tax bracket. Also, too many people have too much of their retirement savings in taxable investment accounts and pre-tax tax-deferred retirement plans (e.g., IRA, 401(k), 403(b) plans). So, it is probably wise to shift taxable and tax-deferred assets to no-tax assets. If not, your income-tax problem simply compounds with time, especially bad if you are relatively young now.

Further, investment accounts and tax-deferred retirement plans heavily invested in the stock market are subject to the downside risks and market volatility, as the recent few months have shown.

Thus, it is time to consider proactive strategies to reduce exposure to financial market losses, reduce future taxation of assets and income, and insulate assets against legal appropriation. As noted above, changes to the tax laws are generally not retroactive (although there are no guarantees). Therefore, planning and structures should be put in place now so they can be activated before any future changes go into effect.

SOLUTIONS

  1. Irrevocable Life Insurance Dynasty Trust

— Tax-free growth

— Tax-free income

— Tax-free death benefit

— No estate or GST taxes, forever

— Risk-free growth (principal protected, 0% floor)

— Benefit you, your spouse & descendants (per your instructions)

— Preserve/continue family values, traditions, businesses

— Protect family assets (against taxes, lawsuits, frivolity)

— Provide financial security for you and family

  1. Leveraged Long Term Care insurance

— LTC benefits are tax-free

— Policy cash value grows

— Death benefit to heirs if cash value is not used up by LTC [NO MORE "use it or lose it"]

— Single or joint policy (couples can be protected on one policy)

— Account value can be leveraged to extend total benefits 2X — 4X (even for lifetime)

— Existing life insurance and annuity policies can be 1035-exchanged to tax-free LTC policies

— Tax-deferred (taxable) retirement money (IRA, 401k, 403b, etc.) can be turned into tax-free LTC benefits

— Owners' assets and retirement income are better protected if LTC needed

— LTC benefits (indemnity payments) may also be used to pay family members who provide care

  1. 401(h) Health Expense Account

— Part of a cash balance plan

— Funded with pre-tax money (tax deductible)

— Account funds grow tax-free

— Tax-free withdrawals when used for qualified health expenses (e.g., medicine, medical equipment, surgery, hospital, co-pays, dental care, eyeglasses, health insurance premiums, long term care (LTC))

— Withdrawals taxed as income if not used for health

— Account can be inherited tax-free by beneficiaries

Visit Law Office of Thomas J Swenson or call 303-440-7800 to learn more about estate and legacy planning, wealth building and asset protection.

Copyright © 2022 Thomas Swenson

Disclaimer: This information is intended for educational use only.

No client or potential client should assume that any information presented or made available on or through this article or linked websites may be construed as personalized planning or advice. Personalized legal advice can only be rendered after engagement of the firm for services. Please contact Law Office of Thomas J Swenson for further information.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained herein (including attachments and links) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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